TECHNICAL ANALYSIS

The VIX & SPX Are At Key Levels Once Again

02/24/05 09:56:01 AMby Kevin HopsonNear-term action in both the VIX and SPX will likely determine whether current weakness in the market will continue.

Security:VIX/SPXPosition:N/A

When I touched on the CBOE Volatility Index (VIX) in mid-January, prices were approaching key resistance, which indicated a possible forthcoming bottom in the stock market. When this reversal occurred and equity prices started to recover, I said the Standard & Poor's 500 Index (SPX) would need to overcome resistance in the 1196 to 1198 range for the rally to continue, citing 1215-1220 as a likely upside target if successful. As you can see in the SPX chart, resistance here was taken out and my upside target (1215-1220) was nearly reached. However, prices have proceeded to pull back, leading me to evaluate the situation once again.

If you look at the VIX chart (Figure 1), you will see that prices cleared the 10-, 20-, and 50-day exponential moving averages (EMAs) on February 22. As a result, you would expect volatility (fear) to continue to build from here. However, there are a few things standing in the way. For one thing, the top parallel line of the black pitchfork is converging right around the February 22 high ($13.20). In addition, the 38.2% retracement level ($13.19) from the October-February decline and the 61.8% retracement level ($13.29) from the January-February decline both come into play here. Because of this, the $13.20 to $13.30 range will likely act as key resistance in the near term.

Figure 1: VIX. If you look at the VIX chart, you will see that prices cleared the 10-, 20-, and 50-day EMAs on February 22.

Graphic provided by: StockCharts.com.

Figure 2: S&P 500. Note that the index recently closed at or near support levels.

If you turn your attention to the SPX chart (Figure 2), you will see that the index recently closed at (or near) key support levels. For example, note how the bottom parallel line of the black pitchfork has acted as ultimate support since last October's bottom. Though the SPX slightly breached this uptrend line on February 22, the 61.8% retracement level (1182.63) is just below. As a result, if the VIX overcomes key resistance in the $13.20 to $13.30 range and the SPX breaches support around 1183, we will likely see a further pullback in the market. However, if prices reverse at these levels, the market could be due for another rally.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.